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Profitability case in Insurance

Insurance Case profitability profitability analysis
New answer on Dec 10, 2023
5 Answers
248 Views
Anonymous A asked on Dec 07, 2023

Hello all - 

I have a case prompt that I am trying to formulate an analysis / problem tree for. Would appreciate any input.

Situation:

A Personal & Casualty insurance company has recently conducted an internal analysis and has determined that its distribution model is unprofitable. This conclusion was determined by analysis the commission earned by its advisors and the allocated costs required to generate that commission. The company also operates a call center and a digital direct to consumer offering. 

The client is trying to improve it’s distribution and bring it back to profitability. 
 

My approach : Revenue vs Costs 

Begin by taking a first principles approach and evaluating the insurer as a whole:

Revenues: 

- Industry: insurer vs industry to determine growth against industry 

-New client acquisition : Determine growth rates regionally for company, growing in the right markets or falling behind in markets

- New client : Determine revenue per client economics to understand if clients are generating revenues in line with industry 

- Existing client : Determine if client is effective at generating revenue from its existing clients 

Costs 

- FC : Determine recent investments (this is where I am struggling, do I need to focus Here?)

- FC : Evaluate FTE bench marking costs

- VC : Evaluate commission structure 

- VC : Evaluate marketing effectiveness and Cost of Acquisition

- VC : Evaluate servicing costs per client / FTE coverage per client 

 

Would appreciate any feedback, thanks ! 

Overview of answers

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Best answer
Ian
Expert
Content Creator
replied on Dec 08, 2023
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi there,

Seconding the others coaches here: You are just listing words.

Consultants don't list words. They think and break down a problem systematically.

PLEASE read this article AND watch the live case videos in the 2 linked cases - you'll see what a good framework looks like: Candidate-Led Cases: What to Expect With Example Cases

=====================================

Please please please, read these articles for a mindset shift

The Most Common Pitfalls in Case Interview Preparation
 

Dos and Don'ts in a Case Interview
 

How to Shift Your Mindset to Ace the Case
 

===============Profitability Learnings================

GENERAL PROFITABILITY APPROACH
You need to understand the industry + company context from the prompt itself to figure this out...cases and case types cannot be memorized...you have to adjust every single time!

 

Example: LOOKING FIRST at Economy/Industry

In my Hot Wheels case, you're a Korean OEM with falling profits. You operate in the US and Japan. The FIRST thing you have to look at here is the general market AND how competitors are doing. Otherwise, you will never learn that US OEMs are doing well in the US while Korean OEMs are NOT doing well in the US. Then, you'll never solve the crux of the case which is that transport times+costs are prohibitively like (Just in Time delivery is the #1 product characteristic).

If you don't look at economy/industry first here, you will not solve the case in a time effective manner.

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/hot-wheels-186

 

Example NOT looking at Economy/Industry

Take my "Chinese Airline During Covid" case example. We know that the airline is in trouble due to covid. We can make the deduction that this is caused by a reduction in demand. As such, we don't really need to look into rest of market/industry

So, we want to "repair" existing revenue streams as much as possible. So, first let's see what we can do. Then, whatever "gap" is remaining, we want to fill it with alternative revenue streams. Finally, whatever we can't make up for, we have to fix through cost cutting (ideally cutting unused capacity). See the logic here?

And it'll change every time based on the case itself...think critically!

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/chinese-chess-airline-business-during-covid-19-191


GENERAL PROFIT DRIVERS

Volume Down: Competition reduced prices or improved their product (outcompeting you), competition just launched effective marketing, regulation has slowed you down, economic decline, environmental disaster, tarrifs, suppliers disrupting your production, your product no longer applies to the customer (i.e. decline has been happening for a while)...and so on and so forth...

Price Down: We're in a price war, costs have gone down so we're realising this, regulation has created a price cap, we ran a discount program

Variable Costs Up: Raw materials costing more, inefficient contracts, ageing workforce, deteriorating workforce, regulations, quality control

Fixed Costs Up: Recent large investments

================================================

REVENUE ISSUES/IMPROVEMENTS
Remember, you need to apply your revenue improvement ideas to the specific case at handYou cannot be generic.

That said, some major ways companies boost sales include:

  • SAAS (software as a service)
  • (Relatedly) Subscription revenue
    • Get people onot subscription plans (i.e. Netflix)
  • Behavior-changing "memberships" - i.e. Amazon Prime
    • When people enter Prime membership, they actually actively spend more than they did before
  • Bundling
    • I.e. sell a few things together
  • Radiation
    • Sell products similar to the current one
  • Low-price entry
    • Get someone in with a super cheap/good deal, then, now that you have them as a customer, sell additional, higher-margin products (insurance companies do this, for example)

==================================================

COST ISSUES
In general, for determining cost issues, you need to break down the problem into a tree/root-cause analysis and ask the highest level (but specific) questions first! In this way, you essentially move down the tree.

How do you identify where to look? Well, you need to look into whichever of the following 5 make the most sense based on where you are:

  1. What's the biggest? (i.e. largest piece of the pie...most likely to change the end result)
  2. What's changing the most? (I.e. could be driving the most and most likely to be fixable)
  3. What's the easiest to answer/eliminate? (i.e. quick win. Yes/No type of question that eliminates a lot of other things)
  4. What's the most different? (differences between companies, business units, products, geographies etc....difference = oopportunity)
  5. What's the most likely? (self-explanatory)

https://www.preplounge.com/en/consulting-forum/structure-breakdown-for-costs-7963

https://www.preplounge.com/en/consulting-forum/inventory-costs-how-to-segment-6861

https://www.preplounge.com/en/consulting-forum/direct-and-indirect-instead-of-fixed-and-variable-6272

https://www.preplounge.com/en/consulting-forum/when-should-i-break-down-costs-as-fixed-and-variable-as-opposed-to-over-the-value-chain-5990

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Lorenzo
Expert
replied on Dec 10, 2023
University of St.Gallen graduate | Learn to think like a Consultant | Personalized prep | CV review

Your analysis approach is a good starting point for assessing the profitability of the distribution model for the Personal & Casualty insurance company. Here are a few additional considerations and suggestions for your problem tree:

Revenue Analysis:

Industry Comparison:

  • Evaluate how the insurer's growth compares to the industry. Consider market share and potential reasons for underperforming or outperforming competitors.

Client Acquisition:

  • Analyze the effectiveness of different channels for client acquisition, including advisors, call centers, and digital direct-to-consumer. Identify which channels contribute most to acquisition and evaluate their cost-effectiveness.

Client Economics:

  • Break down revenue per client to identify the sources of income. Understand if there are cross-selling opportunities or if certain client segments are more profitable than others.

Existing Client Effectiveness:

  • Assess the effectiveness of the company's strategies for increasing revenue from existing clients. Consider factors like upselling, retention, and customer loyalty programs.

Cost Analysis:

Fixed Costs (FC):

  • Explore recent investments and assess their impact on the distribution model. Are there technology upgrades, training programs, or other initiatives affecting fixed costs?

FTE Benchmarking:

  • Benchmark FTE costs against industry standards. Evaluate if the company's FTE costs are in line with or exceed industry norms. This could include assessing the productivity of advisors and call center employees.

Variable Costs (VC):

  • Dive deeper into the commission structure. Evaluate the effectiveness of the current structure in incentivizing advisors and compare it to industry benchmarks.

Marketing Effectiveness:

  • Break down marketing costs and assess the effectiveness of different marketing channels in acquiring new clients. Identify areas for optimization and potential cost savings.

Servicing Costs:

  • Analyze the costs associated with servicing clients. Consider the efficiency of the call center and the effectiveness of digital channels in servicing clients. Are there opportunities to streamline processes?

Overall Recommendations:

Segmentation Analysis:

  • Explore the possibility of segmenting clients based on profitability. This can help identify which client segments contribute the most to profits and where adjustments can be made.

Channel Optimization:

  • Evaluate the overall effectiveness of each distribution channel and explore opportunities for optimization. This could involve reallocating resources, adjusting commission structures, or investing more in high-performing channels.

Customer Experience:

  • Assess the impact of the distribution model on the overall customer experience. Happy and satisfied clients may lead to higher retention rates and positive word-of-mouth, contributing to long-term profitability.

Remember to prioritize the most critical issues based on their potential impact on profitability. Your problem tree can serve as a visual guide to identify areas for further analysis and improvement.

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Pedro
Expert
replied on Dec 07, 2023
Bain | EY-Parthenon | Roland Berger | Market Sizing Expert | 30% discount in Feb & March

I am going to be very blunt with you.

If I were the interviewer and this was your structure you would certainly fail in this case.

The reason is very simple: you are not listening, as your structure has no connection to what was asked.

This case is about distribution channel profitability. You look at company growth, industry growth, revenue generated per customer, investments, number of employees, servicing cost… 

I believe you are trying to fit in a framework in here… whereas what you should be doing was thinking about what questions need to be answered in order to be able to provide a recommendation.

As a structure I would suggest looking: 

1) Into the current distribution model and see how one could improve profitability (which may be a matter of lower commissions, lower costs, or increasing scale) 

2) Evaluate a different distribution model

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Cristian
Expert
Content Creator
replied on Dec 07, 2023
#1 rated MBB & McKinsey Coach

Hi there!

Sorry, but from my point of view, this is not a first principles approach. 

In fact, it's rather a typical framework because you're breaking down profitability into revenues and costs. 

First principles could be, for instance, breaking the structure down into the core questions that could lead to the answer, starting, for instance, with setting their vision. 

In case you're interested in first principles thinking, you might find this useful:

https://www.preplounge.com/en/shop/coaching-packages-5/first_principles_structuring_masterclass

Best,
Cristian

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Frederic
Expert
Content Creator
replied on Dec 07, 2023
ex Jr. Partner McKinsey|Senior Interviewer|Real Feedback & Free Homework between sessions|Harvard Coach|10+ Experience

Hi there, I always recommend not to do revenue/cost as a framework. These simplistic/mathematical frameworks will not lead to success in a MBB interview. Instead structure it around 3-5 buckets with at least 3-5 hypotheses each. 

Warm regards

Freddy

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